Monetary Policy Report—July 2025—Canadian economy
With some new tariff agreements in place, the range of trade policy outcomes has narrowed. Nevertheless, the situation remains fluid and difficult to predict. Canada’s economic outlook therefore continues to be highly dependant on assumptions about how US trade policy could unfold.
The risk of a severe trade conflict with very high tariffs has diminished since the April Report. At the same time, tariff agreements reached so far make it clear that the United States is not returning to open trade with no or low tariffs.
This Report presents a scenario conditional on tariffs in place or agreed on as of July 27, 2025—the current tariff scenario. However, there continues to be an unusually high degree of uncertainty around future trade policy. Therefore, two alternative scenarios—a de-escalation scenario and an escalation scenario—are also considered (Table 1).
Taken together, the three scenarios illustrate a range of paths for the evolution of the global trade conflict (see the Outlook and Global economy sections and In focus: The path of US tariffs remains uncertain).
| Variation | United States | Canada and other countries |
|---|---|---|
| Current tariff scenario |
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| De‑escalation scenario |
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| Escalation scenario |
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The three scenarios show how variations in the rate of tariffs can impact the economic outlook (Chart 13). They vary as follows:
- The current tariff scenario is based on trade policies in place or agreed on as of July 27, 2025.
- The de-escalation scenario illustrates a situation where global trade tensions and tariffs are lower than in the current tariff scenario.
- The escalation scenario illustrates a situation where negotiations deteriorate, resulting in tariffs that are meaningfully higher than in the current tariff scenario.
Current tariff scenario
The current tariff scenario assumes the following tariffs are in place.
- US tariff measures on Canada:
- a 50% tariff on imports of steel and aluminum
- a 25% tariff on the non-US content of imported motor vehicles
- a 25% tariff on motor vehicle parts that do not comply with the Canada-United States-Mexico Agreement (CUSMA)
- a 25% tariff on imported goods that do not comply with CUSMA (a 10% tariff on energy or potash products), other than on motor vehicles and parts
- CUSMA-compliance is assumed to be:
- 100% for energy exports
- 95% for all other goods exports1
- CUSMA-compliance is assumed to be:
- Canada’s retaliatory tariffs on the United States:
- a 25% tariff on approximately $60 billion of imports of US goods
- a 25% tariff on the US content of vehicles imported from the United States with exceptions for CUSMA-compliant components made in Canada and Mexico
- United States measures on countries other than Canada:
- a tariff of at least 50% on imports of steel, aluminum and certain related household appliances
- a tariff of at least 25% on the non-US content of imported motor vehicles and parts, with lower tariff rates for the European Union, Japan, Mexico and the United Kingdom, as established in their trade agreements
- an increase in tariffs of 28 percentage points on goods from China compared with the start of 2025, representing both bilateral and sectoral tariffs
- an increase in tariffs of 9 percentage points on average on countries outside of Canada and China compared with the start of 2025
- China’s retaliatory tariffs on the United States:
- an increase in tariffs on US goods equivalent to 13 percentage points
- China’s retaliatory tariffs on Canada:
- 100% on some agricultural products and 25% on pork and seafood products
- Other countries:
- no retaliatory tariffs imposed
Other key assumptions include:
- Trade policy uncertainty remains elevated around the world into 2026
- Trade tensions reduce total factor productivity (TFP) and investment, lowering the level of Canadian potential output by 0.5% in 2027
- Global potential output is lower by 0.1% in 2027
- Over the scenario horizon, the per-barrel prices for oil are assumed to be US$65 for Brent, US$60 for West Texas Intermediate and US$50 for Western Canadian Select
- The Canadian dollar is assumed to average 73 cents US over the scenario
De-escalation scenario
Trade tensions ease. The United States lowers—but does not completely remove—its tariffs on other countries. As a result, Canada and other countries lower their retaliatory tariffs. Uncertainty decreases but does not disappear.
Compared with the current tariff scenario, the United States:
- halves the level of sectoral tariffs (steel and aluminum, motor vehicles and parts)
- reduces the tariffs on Canadian goods that do not comply with CUSMA to 10% from 25%
- reduces the increase in tariffs on Chinese goods from 28 percentage points to 24 percentage points
- reduces the weighted average increase in tariffs on other countries from 9 percentage points to 6 percentage points
Canada and other countries react by scaling back countermeasures on the United States:
- Canada removes its counter-tariffs on the United States
- China reduces the incremental tariff increases imposed on the United States from 13 percentage points in the current tariff scenario to 1 percentage point
- other countries maintain their policy of not retaliating against the United States
Other key assumptions include:
- Trade policy uncertainty is roughly halved from the level in the current tariff scenario.
- Potential output in Canada is 0.2% stronger at the end of 2027 compared with the current tariff scenario.
- Over the scenario horizon, the per-barrel prices for oil are assumed to be US$70 for Brent, US$65 for West Texas Intermediate and US$55 for Western Canadian Select.
- The Canadian dollar averages 74 cents US over the scenario.
- Other assumptions remain unchanged.
Escalation scenario
The United States significantly increases its tariffs on most countries. The increase on Canada and Mexico is less than on other countries over fears of disrupting the integrated nature of North American supply chains. Canada and other countries increase their retaliatory tariffs.
Compared with the current tariff scenario, the United States:
- imposes a 50% tariff on all copper imports
- imposes a broad-based 10% tariffs on goods imported from Canada and Mexico—this tariff does not stack on tariffs already applied to steel, aluminum, and motor vehicles and parts
- raises tariffs on goods from China from 28 percentage points to 55 percentage points
- increases the weighted average tariff rate on other countries from 9 percentage points to 23 percentage points
Canada‘s retaliatory tariffs on the United States include:
- a 25% tariff on approximately $120 billion of imports of US goods (up from $60 billion in the current tariff scenario)
Other economies’ retaliatory tariffs on the United States since the start of 2025 include:
- China: an increase of 28 percentage points in tariffs on US goods (up from an increase of 13 percentage points in the current tariff scenario)
- European Union: an increase of 15 percentage points in tariffs on US goods (up from zero in the current tariff scenario)
- Mexico: an increase of 5 percentage points in tariffs on US goods (up from zero in the current tariff scenario)
- All other countries: an average increase of 9 percentage points in tariffs on US goods (up from zero in the current tariff scenario)
Other key assumptions include:
- Canadian potential output is roughly 1% lower at the end of 2027 compared with the current tariff scenario.
- Global potential output is lower by 0.1% in 2027 compared with the current tariff scenario.
- The per-barrel prices for oil are assumed to be US$60 for Brent, US$55 for West Texas Intermediate and US$45 for Western Canadian Select.
- Financial conditions are assumed to tighten compared with the current tariff scenario, with the risk spreads on global bond yields widening and global equity prices declining.
- The Canadian dollar averages 71 cents US over the scenario.
- Other assumptions remain unchanged.
Assumptions common to all three scenarios
- Tariffs are assumed to be permanent and to reduce TFP and investment.
- In Canada, half of the revenues from tariffs are remitted to businesses affected by tariffs in line with Government of Canada announcements.
- Remaining tariff revenues are redistributed to households.
- In all other countries, half of the revenues from tariffs are redistributed to households, while the rest is added to general revenues.
- In most countries, three-quarters of the increased costs from tariffs are passed through to consumer prices within six quarters.
- In the United States, tariffs are assumed to pass through to goods prices in roughly three quarters. The United States is the only country to impose tariffs on all its trading partners, increasing the cost of imports from all countries. Therefore, businesses do not need to worry about cheaper substitutes and can pass on tariff-related cost increases more quickly.
- The scenarios incorporate information from published provincial budgets and recent federal fiscal measures that have been tabled at the time of writing.2 Major program measures include:
- the enactment of a federal government tax cut on July 1, 2025
- increases in federal defence spending announced on June 9, 2025
- The rate of population growth of people aged 15 and over in Canada is assumed to slow from 3.3% in 2024 to 1.3% in 2025 and then to moderate further to 0.5% in 2026. Population growth is assumed to be 0.6% in 2027.
- Because it is still too early to assess, the impact from a reduction in interprovincial trade barriers on potential output has not been included in the scenarios.
- The nominal neutral interest rate in Canada is estimated to be in the range of 2.25% to 3.25%.